Hanoi--Chapter 9 of the Trans-Pacific Partnership (TPP) addresses a critical issue for many firms: the rules of the game that apply to foreign investors in TPP countries. Currently, TPP investors can face a complicated thicket of regulations, shifting rules, and informal practices that make it difficult or even impossible to open and maintain businesses and investments in some TPP member countries.

This chapter aims to simplify and clarify the rules for inward investment by TPP firms. Doing so should make it easier for firms to operate across TPP countries and help unleash new growth for member countries. It may ultimately be the most important chapter for a member like Vietnam.

While most of the attention has been given to one aspect of this chapter, Investor-State Dispute Settlement (ISDS), let me begin by highlighting the rest of the rules in the chapter before turning to ISDS specifically. As in many TPP chapters, the legal language can be dense and should be used with guidance from a good legal team that has experience decoding other trade agreement provisions.

When TPP parties speak of investments that are covered, they have a broad range of activities in mind, including: an enterprise; shares, stock and other forms of equity participation in an enterprise; bonds, debentures, other debt instruments and loans;futures, options and other derivatives; turnkey, construction, management, production, concession, revenue-sharing and other similar contracts; intellectual property rights; licences, authorisations, permits and similar rights conferred pursuant to the Party’s law; and other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages liens and pledges.

The basic point of the chapter is to ensure that investors are granted greater certainty with fewer risks of government action that could negate or destroy their investments.

Investors are also promised free transfers of things like profits, dividends, proceeds, and payments from the investment in and out of the member country. Investors are also granted the ability to invest without being subject to certain performance requirements, such as a possible demand that investors export a certain amount, or include a certain percentage of local content, or transfer technology as a condition for investment permission.

The rules create opportunities for firms, but are not a guarantee of success. Nothing in the chapter promises profits or will compensate investors for normal business risks and losses.

What is spelled out in detail, however, are the rules regarding what happens when a TPP member government directly or indirectly seizes property through expropriation (nationalization). Government can, it should be emphasized, continue to make policy in the public interest and render decisions that could invalidate investments. For instance, a government can legitimately order the demolition of shops if these stand in the way of land needed for new roadways. However, the TPP makes clear that the government must follow certain policy steps prior to expropriation and provide adequate compensation.

In most of the rest of the TPP agreement, member states are legally bound to follow the rules. If they do not, other member governments can challenge their behavior, using the provisions in the dispute settlement chapter.

Investors also have recourse to another mechanism for ensuring compliance. Section B of the chapter spells out in detail the rules around ISDS that allows investors to directly sue a government for breach of the agreement (illegal seizure of property). The lengthy passages devoted to ISDS spell out in detail how investors can claim arbitration to resolve the dispute.

Investors, like all business owners, also have the right to use domestic court procedures to resolve issues. However, if the government seizes property, it is not unreasonable to assume that some court systems in some countries might not view the matters of the case dispassionately or may hesitate before deciding against their own government. In these situations, investors have the ability under the TPP to have the matter dealt with by arbitration.

The concerns about ISDS generally involve a few points. First, it means that domestic government decisions could be overturned by a foreign entity. TPP officials were keenly aware of this possibility and have tried to ensure that governments maintain their right to regulate and make laws in the public interest while balancing the needs of investors. Early versions of ISDS, as found in many of the nearly 3000 bilateral investment treaties (BITs) and free trade agreements (FTAs), had much less precise rules around the use of ISDS.

Second, firms could use ISDS to sue governments with great regularity. In practice, this has not happened. Companies do not launch complaints very often. I would argue that ISDS is a bit like a “nuclear option.” This is an approach that can only be used when all other approaches have been tried and found lacking, because a company that complains about a foreign government is not likely to find a hospitable environment for doing business in the country in the future.

Third, ISDS can be used for any type of breach. This is not correct for the TPP, which takes great care to detail the conditions that warrant the use of ISDS. Annex 9B spells out in detail exactly what constitutes an expropriation for the TPP.

Just like the services commitments discussed in yesterday's post, understanding TPP investment provisions requires carefully reading the specific text with the rules that apply to all 12 parties and then sorting through the annexes. Note that Chapter 9 contains several short annexes in the text—several of which are country specific or applicable to, for instance, Peru, Mexico or Canada.

Investors or potential investors will also need to carefully review the country-specific annexes that list all non-conforming measures (NCMs). Just like the services negotiations, investment commitments were made on the basis of a negative list. If your sector or industry is NOT listed, it means you have access.

The list of NCMs for investment also contains a range of prohibited investments or restrictions on full access for TPP members. Some of these restrictions may be problematic as the exemption can be deep and broad while others are likely to be of limited commercial significance.

Canada, for instance, maintains the right to regulate the sales and marketing for air transportation services, as well as many rules around maritime services and transport, and maintains a possible cultural exception that allows the government to create rules or subsidize books, videos, music and other forms of cultural expression. Malaysia reserved the right to review materials for consistency with domestic decency standards.

Japan has an odd commitment that allows it to create any measure it wants for “telegraph services, betting and gambling services, manufacture of tobacco products, manufacture of Bank of Japan notes, minting and sale of coinage, and postalservices in Japan.” Vietnam bundled together potential restrictions on the manufacturing of paper and buses with more than 29 seats. The complicated nature of these commitments—combining things that may not appear logically connected—highlights the importance of reviewing the entire TPP document for hidden barriers.

Malaysia has scheduled a broad exception for Bumiputera policies. These are the programmes that provide advantages for Malay citizens, somewhat akin to affirmative action programmes used elsewhere. While considerably less sweeping, several other TPP members also lodged NCMs to protect native peoples.

How much these measures will affect your potential investment depends on whether you had hoped to manufacture buses with more than 29 seats or planned to operate a taxi or create movies you wanted to show in some local theaters. For most investors, however, the TPP will grant significant new access to investment markets. Equally important, the investment chapter and its provisions help ensure that the rules that allow such foreign investment will not shift overnight in the future. For most investors, greater certainty and less risk are always helpful.